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Is forfeited deposit tax deductible?

Sorry if this has come up many times before. Son accepted admission at a college, but later got off the waitlist at his #1 choice, where he will be going in the fall. A friend suggested that the forfeited deposit should be tax deductible, since no goods or services were provided. Is this correct? Should I write to the first school and ask for a letter acknowledging our gift? Thanks for any pointers.

Replies to: Is forfeited deposit tax deductible?

Your friend is dead wrong; your lost deposit was not a "gift." Your son sent the money in for the sole purpose of securing a spot in the freshman class. The fact that he later changed his mind and backed out of the deal does not make it tax deductible.

It's just like losing your earnest money when you back out of a contract to buy a house. The other party gets to keep the deposit/earnest money to help compensate for any damages it suffers due to your breach of contract. The school now has to find another student to fill that seat left vacant by your son.

LOL, it would be interesting to see if the college would acknowledge or be willing to pretend to treat a forfeited deposit as a "gift" and put in writing that your forfeited desposit was a gift. It might be considered a charitable contribution if you can get something in writing as an potential audit backup but if I were a college I'd probably laugh at your request.

A deduction is one that is allowed by the Internal Revenue Code. Generally you can take deductions for business expenses and only certain investment expenses if you itemize.

College payments/deposits are considered personal expense akin to home ownership,buying clothes etc. Accordingly, the forfeited deposit is NOT deductible and neither is the yearly tuition payment.

Interestings, had you hired your child to work in your business or rental property, you could have deducted the wages. He could have u sed those deducted wages to pay his own tuition,which is getting the equivalent of a deduction for the tuition. However,now it is a bit late for this.

tulipdad...I agree with the others. You DID get something for the deposit and it was not a "gift" to the college. What you received was holding a spot in the class. You have chosen not to use that spot NOW but you got the spot held for your son during the period of time you needed it held and it was not given to someone else during that time. You knew it was nonrefundable at the time. I'm afraid you are tiptoeing through the tulips to see it otherwise.

had you hired your child to work in your business or rental property, you could have deducted the wages. He could have u sed those deducted wages to pay his own tuition,which is getting the equivalent of a deduction for the tuition. However,now it is a bit late for this.

A friend suggested that the forfeited deposit should be tax deductible, since no goods or services were provided. Is this correct? Should I write to the first school and ask for a letter acknowledging our gift?

No. It wasn't a "gift" it was money you paid for services (holding your spot). Your just out the money.

If you ask them to classify it as a gift then you're asking them to break the law and thus I don't think such a request would be looked upon favorably.

Interestings, had you hired your child to work in your business or rental property, you could have deducted the wages. He could have u sed those deducted wages to pay his own tuition,which is getting the equivalent of a deduction for the tuition. However,now it is a bit late for this.

Not really. You're simply transferring the tax liability to your child so in the end there's really no net savings.

No. There was no "casualty." They made the voluntary decision to not attend and knew you were going to lose the deposit if they did that.

If you put a deposit down on something under contract (in this case a college place) and then break the contract (in this case by not attending and paying the tuition) then you're just out the money plain and simple. It's not a tax writeoff.

Perhaps the child is in a lower income bracket than the parent-employer.

Perhaps... but if you're paying the child anything substantial (above and beyond what you could just give them as a tax free gift or transfer) then you start getting into other expenses too. Remember that some tax gets charged to both the employee and the employer.

Also, if you're giving your child a "job" that's not really a job for a tax dodge then your committing fraud. I've seen people do it and they'll get screwed if they ever get audited... having family on your payroll is always something that comes under the microscope in part just for this reason.

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